Let’s Be Realistic About Pre-seed Startups!

In my angel experience investing in angel funds, we often debrief a pitch session after the founders are gone. We usually have seven to ten days after the pitch session to decide whether to invest in the startups. Since we have diverse backgrounds and profiles, listening to other angels' comments is beneficial. Comments like “You know, they don’t have traction yet”, “Shouldn’t they be more advanced in terms of product readiness?”, or even “How to guarantee that this product is a good one?” are common. Once, I even heard, “They don’t have all the answers yet.”

"Don’t get obsessed about the product"

However, if I could list three important factors to consider when investing in a startup, I would say market, product, and team. Of these three, the easiest to change is always the product.

Market change is out of our control. So, analyze as much as you can. But once you are convinced it is a good size of the market and with a good trend of growth, or some interesting aspects about regulation, barriers, etc., there is not much to act on.

Changing the team of founders is always painful and in many cases, it leads to the end of the company. So, evaluating the team, if they are functionally complementary, and if they work well together is crucial. Also, if they understand the problem, their experience in the industry, and if they have enough grit to overcome the challenges, this is all important. And if they are willing to change the product to respond to changes in the market or to respond to non-validated assumptions.

The product? This should be the easiest of the three to be changed. Founders should be willing to test it and change it accordingly. Not only the features but the business model, the way to communicate, the partnerships, and the distribution channels.

So, having a good product or MVP is nice, but this is the beginning of the journey. The ones who can say the product is good enough are the clients, not the investors. We need to read the signals that demonstrate they have reached or are close to reaching the so-called product market fit. We need to ask the questions that will answer how close they are to reaching clients, selling, serving, satisfying, and keeping them. Metrics like churn, recurring revenue, revenue concentration, customer acquisition cost… all these are important indicators to cpreonsider."

“The team might not be complete”

They don’t have a CFO? Really? That’s not a problem for me. They need first to generate money and then find someone to take care of it. So, I would say a CFO is not a priority. The CEO will take this role for a while. In the pre-seed phase, they require someone on product and technology (not the neighbor’s cousin doing favors in her spare time) and someone on sales and marketing. At this phase, it is more important to know what they have in place as a team and what are the plans for the future team.

“Open questions unveil more”

Open questions unveil more. If you ask ‘Are you all dedicated to the company?’ The answer will be ‘Yes’. If you ask ‘How much do you dedicate to the company compared to other projects or jobs?’ you might get a more nuanced answer.

Good open questions and accepting incomplete answers are key. The founders are still in a phase where they don’t have all the answers and it is positive if they recognize this. It shows humility and a willingness to learn and adapt, which are crucial traits for any successful startup.

When evaluating a pre-seed startup, look beyond the surface. Don’t get hung up on the product or the completeness of the team. Instead, focus on the market potential, the adaptability of the product, and the grit and determination of the team. Remember, at this stage, it’s all about the potential and the willingness to pivot and adapt.

Happy investing!